Housing Market Equilibrium In 2018: Case Study Details Why
Preliminary data on Tallahassee population is starting to trickle in from the 2010 Census, and growth appears to be the continuing trend which is good news for those of us seeking a housing market equilibrium.
The real estate market greatly needs a growing population to consume the glut of homes for sale in Tallahassee. Even though there will be more data provided by the US Census in the months to come, we now have enough for an accurate case study on housing market equilibrium.
By the end of this post, you will completely understand why we have 7 more years to go!
Tallahassee Population Grows By 1.41% Per Year
For long-term readers of the Tallahassee Real Estate Blog, you might notice that I often use "Tallahassee" and "Leon County" in this Housing Market Equilibrium Case Study interchangeably. When I report on the Tallahassee housing market, I'm including all home sales in Leon County.
However, the Census breaks-down the difference between Tallahassee and Leon County, so I have included a pie-chart to show how the Tallahassee population (and Leon County population) as of the 2010 US Census.
For our new out-of-town readers, we have often demonstrated that Tallahassee is a near-perfect microcosm of the US housing market, thus I would not be surprised if the results of our housing market equilibrium analysis are similar to what you should expect in your area.
This US Census reports that the population in Leon County grew 15% from 2000 to 2010, which is an annual rate of 1.41%. The population in Tallahassee grew to 181,376, while the population in Leon County (outside of Tallahassee) grew to 94,111, bringing the total population of the county to 275,487. For the Tallahassee to reach a housing market equilibrium, we need this population growth!
Rate Of Population Growth In Tallahassee Declines
It is really good news for Tallahassee that our population is growing, as we need more people to move here and help consume the additional homes that were built during the boom of the housing market. Unfortunately, our rate of population growth continues to decline. Using Tallahassee population data going back to 1840, I have created a population growth rate graph to show how fast Tallahassee (Leon County) has been growing.
This population growth rate graph shows four different measurements of our population growth rate, from a 10 year trend all the way out to a 70 year trend. All four are currently declining, and they show rates from 1.4% to 2.4%. Simply put, this means that we have averaged a 1.4% annual growth rate looking back ten years, but looking back 70 years, our growth rate has been higher at 2.4%. We can use this information to make our assumptions when looking forward to forecast the return to a housing market equilibrium.
Using Population Change Trends To Forecast Housing Market Equilibrium
Suppose we were to take what we know (Census data + housing data) and then apply what we've measured (growth trends and inventory trends) in order to forecast a likely future for the Tallahassee housing market? That is what I have attempted to do. First, by using the US Census Bureau's measurement of the population in Leon County over the past 170 years, we can apply current trends to come up with a range of forecasts.
Our graph shows four different forecasts, from the most conservative (using the current trend of population growth) to the most liberal (using the average rate of growth over the past 70 years). The most realistic one to use for our long-term perspective is the 50 year population growth trend (shown in purple on the graph). It projects the population of Tallahassee (Leon County) to be nearly 500,000 people by the year 2040. But for the sake of producing a conservative estimate for the return of housing market equilibrium, our forecast will utilize the lowest of the measurements.
Current Housing Inventory In Tallahassee
Our long-term readers know that we vigorously track the inventory of homes for sale in Tallahassee on our various websites. Without going in to a detailed review, my rough estimate of the current housing glut is this:
|Homes For Sale In Tallahassee||2,450|
|Shadow Inventory Of Homes||5,000|
|Homes That Failed To Sell Since 2007||6,500|
|Excess Supply Of Rental Units||800|
|Total Gross Supply Of Homes||14,750|
Population Growth: Housing Consumption Analysis
In order to have a fairly accurate view of our housing market situation, we have to trim some of the supply identified above. First of all, not all homeowners who failed to sell (and have not since re-listed or sold the property) will be moving away from Tallahassee. In fact, we can estimate that 80% of these people will stay in Tallahassee, and thus purchase or lease (consume) another home here. Therefore, the 6,500 homes listed in this category can be reduced to 1,300. Additionally, our current supply of homes for sale in the Tallahassee MLS is fairly normal, so we can remove those from our count as well (we always expect to have an inventory of homes for sale on the market). Therefore, the final tally on the "glut" that we are hoping population growth will consume is about 7,100 homes.
The latest information from the US Census tells us that our housing density is 2.34 people per housing unit, so we will need to grow by 16,614 people before we have a "normal" inventory of homes for sale in Tallahassee. This would be our point of market equilibrium and at this level we would expect to see homes appreciate at their "normal" rate of about 3% to 4% per year. But wait, there is one more variable to consider ...
The new construction in Tallahassee of housing units will add to the supply, even if the homes are custom built for land owners or if one of our universities decides to add a dorm. This variable is an "unknown," but for simplicity purposes, let us suspect to add about 800 units per year until we hit equilibrium. Thus, our final formula for projecting equilibrium in the housing market is 16,614 new people plus (800 units x 2.34 people per unit, per year). It might sound a bit confusing, so why don't we just have a look at it in a graph.
Restoring Housing Market Equilibrium
The following graph is my best forecast for the Tallahassee housing market to return to equilibrium by the year 2018. There are many variables that can change the forecast, for better and for worse, but based upon current information, this seems to be realistic. Of primary concern on variable includes first and foremost, our reliance on population growth. Nevertheless, I used the lowest projection for population growth, and I used a conservative figure for new construction starts, so I believe the forecast to be as accurate as can be produced at this time.
In the graph above, the blue line represents expected population growth, while the red line is the reduction of population gains due to people moving into homes that currently do not exist. The resulting green line is the net gain of people who need to move into a Tallahassee housing unit. The purple line shows the count of homes being reduced from the glut each year, while the black area represents the totality of the glut of homes for sale in Tallahassee. Based upon this projection, the market should hit equilibrium in the first quarter of 2018.
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